Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality

47 Pages Posted: 21 Jun 2002 Last revised: 2 Nov 2012

See all articles by Sean Nicholson

Sean Nicholson

Cornell University - Department of Policy Analysis & Management (PAM); National Bureau of Economic Research (NBER)

Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Jeffrey McCullough

University of Pennsylvania - The Wharton School

Date Written: June 2002

Abstract

Biotechnology companies rely heavily on alliances with pharmaceutical companies to finance their research and development expenditures, and pharmaceutical firms rely heavily on alliances to supplement their internal research and development. Previous studies suggest that asymmetric information may lead to inefficient contracting. We examine the determinants of biotech-pharmaceutical deal prices to determine whether the market for deals between biotech and pharmaceutical companies functions as a well-informed market or whether it is characterized by asymmetric information. We find that inexperienced biotech companies receive substantially discounted payments when signing their first deal. Drugs that are jointly developed are more likely to advance in clinical trials than drugs that are developed by a single company, so the first-deal discount is not consistent with the post-deal performance of these drugs. We also find that biotech companies that sign deals receive substantially higher valuations from venture capitalists and from the public equity market, which implies that the discounts are rational; a biotechnology company that is developing its first product benefits from forming an alliance with a pharmaceutical company because it sends a positive signal to prospective investors.

Suggested Citation

Nicholson, Sean and Danzon, Patricia M. and McCullough, Jeffrey, Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality (June 2002). NBER Working Paper No. w9007. Available at SSRN: https://ssrn.com/abstract=316786

Sean Nicholson (Contact Author)

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

120 Martha Van Rensselaer Hall
Ithaca, NY 14853
United States
607-254-6498 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey McCullough

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6861 (Phone)
215-573-2157 (Fax)

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